STRENGTHS

Large population that is young (50% is under 25), qualified and with good command of English

Diverse geographic and sectoral origin of remittances from expatriate workers (10% of GDP)

Thriving Business Process Outsourcing (BPO) sector

WEAKNESSES

Low rates of investment: inadequate and outdated infrastructure

Governance shortcomings: bureaucracy and corruption

High levels of income inequality

Problematic security situation in the South with Muslim groups

Strict bank secrecy and casinos facilitate money laundering

RISK ASSESSMENT

Growth expected to remain strong

In 2019, the economy is expected to maintain its momentum, buoyed above all by domestic demand. Although consumer sentiment will remain negatively affected by high inflation due to a weaker peso and rising energy prices (80% imported; not subsidised), household spending (70% of GDP) is expected to remain the main driver of growth. Remittances from expatriate workers (10% of GPD), mainly from the United States and the Gulf countries, will likely show a more volatile growth rate, but should continue to benefit household consumption. Moreover, the bullishness of the economic outlook will be supported by strong credit growth for both companies and households. Credit growth will be favoured by negative or low real interest rates (interest rates minus inflation), even as the Bangko Sentral ng Pilipinas (BSP) is expected to perform further rate hikes to curbinflation.

Investments (25% of GDP) should grow moderately in 2019. They will benefit from public infrastructure projects, while FDI – which account for only 2% of GDP – are expected to remain below potential. Businesses will likely experience pressure to invest because of the high production capacity utilisation rate, but lingering uncertainties surrounding domestic reforms and the external environment will see them continuo to be cautious. Most investment growth will therefore be on the back of the ambitious “Build Build Build” public infrastructure investment project. This should increase growth potential in the medium- to long- term. Export growth will slow down, especially compared to import growth, as demand for electronic components (50% of exports) will slow because of market saturation and competition. The Business Process Outsourcing (BPO) and tourism sectors should continue to perform well.

Deterioration of the budget deficit; current account under pressure

The budget balance is expected to deteriorate in 2019 as the rise in revenue will not be enough to offset the rise in spending. The extensive tax reform is set to increase revenues by levying excise duties (fuel, automotive products, alcohol and tobacco), broadening the VAT base, and implementing higher tax rates for higher income brackets. However, this reform will not be enough to compensate the increase in spending induced by President Rodrigo Duterte’s infrastructure investments and social programmes (child vaccinations, assistance for poor families, extended health insurance cover, universal primary education). Moreover, additional transfers will continue to be made to low income households, who are affected by the tax reform and accelerating inflation. Despite the growing imbalance, strong growth should help stabilise the public debt-to-GDP ratio, and almost all of the public debt has medium to long term maturity, while over two thirds of this debt is held by domestic creditors and denominated in local currency.

The balance of payments should record a lesser deficit than in 2018 as net capital outflows – triggered by the US monetary tightening and subsequent BSP spending of foreign exchange reserves to defend the peso – will decrease. Depreciation pressures should ease somewhat throughout 2019 (-7.3% in Jan.-Oct. 2018). Despite the fast rate of depletion in 2018, foreign exchange reserves will remain adequate, representing around seven months of imports. FDI levels are low, in part due to the consequence of restrictions on FDI, higher production costs than those in neighbouring countries, and political uncertainties. The trade deficit will remain high as export growth will continue to not compensate the rise in imports, which are driven mainly by domestic demand, imported parts for use by industry (especially electronics and information technology outsourcing), the peso’s depreciation and rising energy prices.

Presidential promises facing a reality check

Rodrigo Duterte was elected in May 2016 for a term of six years, succeeding Benigno Aquino. His ethos is twofold: combatting inequalities, and law and order. Like his predecessor, he intends to introduce universal healthcare (currently 93%) and free education from pre-school up to basic university degree level. Combating drug trafficking, maritime piracy and Islamist terrorist groups (Abu Sayyaf and Maute groups) is the other priority. In this regard, the country is building closer ties with its neighbours, Indonesia and Malaysia. Relations with China have improved significantly under his mandate, even though some tensions linger in relation to territorial disputes in the South China Sea. Despite some successes in fighting radical Islamist groups, the president's high popularity ratings have tumbled (45% in approval ratings mid 2018) following drug-related extrajudicial executions, allegations of corruption against allies of the president, rising inflation eroding purchasing power, and alleged blasphemous stances.